Thursday, October 15, 2009

The State of General Aviation and the Consequences for Wichita

The National Business Aviation Association conference is opening in Orlando, Florida next week.  It and surrounding events will provide focus the business world's attention on general aviation and the economic hammering it has taken.  The Wichita Eagle's Molly Mullins in a big Business Section feature surveys the damage, "The state of Kansas' business aviation industry."

She writes:

"Nobody saw this coming.

"Thousands of jobs lost. Production cuts. Furloughs. The cancellation of a major new aircraft program.

"The global financial crisis hit the business jet market hard and fast and put Wichita's lifeblood industry in an agonizing free fall.

"A year later, there is evidence that the global economy is in the early stages of recovery. But for business aviation and Wichita planemakers, the climb back will be long and slow."

Back in March, 2008, I argued that the national economy had been in a recession for six months or more ("What is Good for Wichita Is Hemlock for Wall Street.") The National Bureau of Economic Research eventually dated the recession to have started in December, 2007.  Few fully appreciated the extent of the general aviation bubble ("2007 Increasingly Looks like It was a Bubble Year for the Aircraft Industry.")  The bursting, when it came in the fourth quarter of 2008 was dramatic. 

Peter Sanders at the Wall Street Journal reports on the effect of the aviation downturn on Wichita's economy noting that "more than a quarter of the area's aviation work force has been let go, not including thousands more layoffs among parts suppliers and support businesses."

Cessna's New Orders "Nosedived" In the Fourth Quarter of 2008

To amplify Sanders' report, Cessna's new orders, net of cancellations, averaged about $2.4 billion a quarter in the first three quarters of 2008.  They fell over 80 percent to $400 million in the last quarter.  (These are my estimates based on Textron financial reports.)


Sanders also reports on a "recent push to manufacture offshore that many Wichita aerospace companies have embarked on. Some companies have opened operations in Mexico. During the boom times in late 2007, Cessna announced it would build a new, small propeller plane in China. That plane would be shipped to Wichita for reassembly and delivery to U.S. customers.

"While the companies are guarded about their plans in light of the downturn, officials concede that it is unlikely that they would expand their Wichita operations beyond today's level. Any future growth would probably happen abroad."


A few points:

1) 2007 was a bubble year for general aviation.  Look at the new orders data. 

2) The bubble was fueled by the same over expansion of credit that fueled the housing bubble. 

3) The negative short term interest rates of 2002-2004 enabled (should I say caused?) the credit over expansion.

4) The general aviation industry over expanded in 2008. 

Fun Question: Would Cessna have expanded production as much in 2008 had it been independent rather than owned by Textron?

5) On the commercial front, Boeing expanded much more cautiously.  Compare Boeing's production in the run-up to this recession with its production in the run-up to the 2001 recession.   This has allowed Spirit to hang tight and manage for the longer run.

Fun Question: Do you attribute that to good management, conservatism, or technical delays?

6) Hypocrisy in Washington about corporate jets is business as usual.  Congress votes to appropriate for themselves a more elaborate fleet of planes than the Air Force requested.  Simultaneously, it pillories corporate executives.  (For the Journal, Brody Mullins and August Cole reported in August, "the House more than doubled the [Air Force's] request to $550 million for a total of eight new passenger planes for use by government VIPs.")

7) Outsourcing has its drawbacks as the yo yo economy of 2008 demonstrates.  

8) Outsourcing means having less control.  Boeing has had to buy back three of its suppliers to get the Dreamliner back on path.

9) The administration's fiscal policy and the Fed's monetary policy represent more than the benign neglect of the 1980s.  This may be Washington's real industrial policy.  Let the dollar get so worthless that manufacturing will find it cheaper to come home.  We can debate whether that is a plan.

In the long view of things, Wichita's current 8.9% unemployment rate (10% in July) is collateral damage from Alan Greenspan's and Ben Bernanke's misjudgment that preventing bubbles was not their job.  As in the refrain from the old Pete Seeger song goes, "When will they ever learn?"

1 comment:

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